A major shortfall in bank capital

Australia’s biggest and most complex banks will have four years to conjure up the extra capital to meet a lofty minimum total capital ratio target of around 19 per cent.

In a discussion paper that complements work on resolution planning for banks in distress, APRA said each of Australia’s four major banks “would be required to maintain additional loss absorbency of between four and five percentage points of RWA.

“It is anticipated that each D-SIB’s Total Capital requirement would be adjusted by the same amount.”

This capital, APRA said, would most likely take the form of additional Tier 1 and Tier 2 capital instruments, being those “most appropriate to meet an ADI’s resolution needs.”

It said “regulatory capital has proven to be effective in absorbing losses in ordinary times in Australia and has been effective in absorbing losses in resolution in other jurisdictions.”

Most of Australia’s banks won’t be affected in any manner, though “a small number … may require additional loss absorbency to facilitate resolution, due to their complexity or the nature of their functions,” APRA said.

All the extra capital will confer limited bragging rights.

APRA analysis found that Australia’s major banks overall will even post-2023 have nowhere near the median level of “total Capital and … loss-absorbing capacity” projected for their international peers.